<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5051 NEW CENTRE DRIVE, WILMINGTON, NC 28403
(Address of principal executive office) (Zip code)
(910) 392-1606
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
The number of shares of the Registrant's common stock outstanding as of
November 7, 1997 was 16,293,407 shares.
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APPLIED ANALYTICAL INDUSTRIES, INC.
Table of Contents
The terms "Company", "Registrant" or "AAI" in this Form 10-Q include
Applied Analytical Industries, Inc. and its subsidiaries, except where the
context may indicate otherwise. The term "L.A.B." refers to L.A.B. Gesellschaft
fur pharmakologische Untersuchungen mbH & Co., which was acquired by the Company
as of December 31, 1996. Any item which is not applicable or to which the answer
is negative has been omitted.
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Statement of Income 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 11
EXHIBIT INDEX 12
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (unaudited)
APPLIED ANALYTICAL INDUSTRIES, INC.
Condensed Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales (includes related party
net sales of $881; $2,608; $4,228
and $7,575, respectively) $ 14,021 $ 10,396 $ 45,010 $ 31,170
Operating costs and expenses:
Cost of sales 7,994 4,194 23,051 13,010
Selling 2,268 1,448 5,932 4,575
General and administrative 4,022 2,016 11,237 6,672
Research and development 2,379 1,398 5,750 3,189
-------- -------- -------- --------
16,663 9,056 45,970 27,446
-------- -------- -------- --------
Income (loss) from operations (2,642) 1,340 (960) 3,724
Other income (expense):
Interest income 431 74 1,739 316
Other, net 63 (114) (273) (377)
-------- -------- -------- --------
494 (40) 1,466 (61)
-------- -------- -------- --------
Income (loss) before income taxes (2,148) 1,300 506 3,663
Provision (benefit) for income taxes (984) 501 177 1,468
-------- -------- -------- --------
Net income (loss) $ (1,164) $ 799 $ 329 $ 2,195
-------- -------- -------- --------
Earnings (loss) per share $ (0.07) $ 0.06 $ 0.02 $ 0.18
-------- -------- -------- --------
Weighted average shares
outstanding 16,519 13,484 16,457 12,444
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
APPLIED ANALYTICAL INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,714 $ 42,186
Accounts receivable 16,188 10,033
Work-in-progress 9,117 9,462
Prepaid and other current assets 5,616 6,357
-------- ---------
Total current assets 57,635 68,038
-------- ---------
Property and equipment, net 23,682 19,216
Goodwill and other intangibles 12,680 14,953
Other assets 2,676 2,271
-------- ---------
Total assets $ 96,673 $ 104,478
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and short-term debt $ 6,198 $ 2,092
Accounts payable 4,166 8,429
Customer advances 5,987 7,790
Accrued wages and benefits 3,590 5,127
Other accrued liabilities 4,254 8,845
-------- ---------
Total current liabilities 24,195 32,283
-------- ---------
Long-term debt 6,811 6,671
Other liabilities 1,099 1,529
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 16 16
Paid-in capital 66,953 66,719
Retained earnings (deficit) (2,252) (2,591)
Stock subscriptions receivable (149) (149)
-------- ---------
Total stockholders' equity 64,568 63,995
-------- ---------
Total liabilities and stockholders' equity $ 96,673 $ 104,478
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
APPLIED ANALYTICAL INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Net income $ 329 $ 2,195
Adjustments to reconcile to net cash provided
(used) by operating activities:
Depreciation and amortization 3,522 1,475
Other 501 39
Changes in assets and liabilities:
Trade and other receivables (6,353) (3,097)
Work-in-progress (187) 1,174
Prepaid and other assets, net 624 (2,112)
Accounts payable (3,935) 258
Customer advances (1,164) (882)
Other accrued liabilities (5,411) (54)
-------- --------
Net cash provided (used) by operating activities (12,074) (1,004)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (8,124) (5,070)
Other (40) 55
-------- --------
Net cash used by investing activities (8,164) (5,015)
-------- --------
Cash flows from financing activities:
Net proceeds (payments) short-term debt 4,078 (2,556)
Net proceeds (payments) long-term borrowings 653 (446)
Dividends -- (1,051)
Sale of common stock 63 44,829
-------- --------
Net cash provided (used) by financing activities 4,794 40,776
-------- --------
Net (decrease) increase in cash and cash equivalents (15,444) 34,757
Effect of exchange rate changes on cash (28) --
Cash and cash equivalents, beginning of period 42,186 13,081
-------- --------
Cash and cash equivalents, end of period $ 26,714 $ 47,838
-------- --------
Supplemental information, cash paid for:
Interest $ 424 $ 359
Income taxes $ 1,402 $ 1,393
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
APPLIED ANALYTICAL INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
applicable Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. It is presumed that users of this interim financial
information have read or have access to the audited financial statements for the
preceding fiscal year. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the full year.
2. EARNINGS PER SHARE
The weighted average shares used in the calculation of earnings per share for
1997 represents the weighted average shares outstanding plus the dilutive impact
of stock options. The shares used in the calculation of 1996 earnings per share
represent pro forma shares which take into consideration convertible preferred
stock and common stock options and awards issued during the twelve months
preceding July 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, which establishes new standards for computing and presenting earnings per
share information. This statement will be effective for the Company's year-end
1997 financial statements and will require the restatement of all prior-period
earnings per share data presented; however, earlier application is not
permitted. The earnings per share data for 1997 will be the same as that
computed under the new standard, assuming dilution. The Company has not
determined the impact on prior-period data at this time.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company's quarterly results have been and are expected to continue to be,
subject to fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including the commencement, completion or cancellation of large
contracts, progress of ongoing contracts, recognition of licensing revenue,
potential acquisitions, the timing of start-up expenses for new facilities,
potential inefficiencies from increased staff levels to meet increased demand
for services and changes in the mix of services. Since a large percentage of the
Company's operating costs are relatively fixed, variations in the timing and
progress of large contracts or the recognition of licensing revenue (on projects
for which associated expense may have been recognized in prior periods) can
materially affect quarterly results. In addition, 1997 includes the operating
results of L.A.B., the European contract research organization which was
acquired by the Company on December 31, 1996. Accordingly, the Company believes
that comparisons of its quarterly financial results may not be meaningful.
RESULTS OF OPERATIONS - THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Net sales for the third quarter of 1997 increased 35% to $14.0 million compared
to $10.4 million in 1996. The core fee-for-service revenues were $12.6 million
in 1997, up 25% from $10.1 million in 1996. The addition of L.A.B. was a major
contributing factor for this increase. Sales to related parties declined by 66%
in the third quarter of 1997 compared to third quarter of 1996 because certain
products had completed development in earlier periods. This sales volume was
replaced with a 22% increase in sales to outside customers.
Revenues from licensing and royalties were $1.4 million in 1997 compared to
$312,000 last year. The majority of the 1997 revenue, $880,000, was from
European dossier sales, mostly triggered by the approval of certain nifedipine
sustained release products in Germany. As previously disclosed, the Company had
suspended discussions on new license arrangements because of a potential
business combination transaction. This action had an adverse effect on both
second and third quarter 1997 results. The business combination discussions were
terminated midway through the third quarter and the Company has resumed normal
licensing activities.
Cost of sales as a percentage of net sales increased to 57.0% compared to 40.3%
last year. This increase is mostly attributable to the addition of L.A.B., which
has historically operated at lower margins compared to the domestic operations
of AAI. The Company has instituted changes at L.A.B. that are expected to
increase operating margins to be more in-line with domestic results. Operations
in the U.S. were negatively impacted by higher costs and inefficiencies in
certain areas because of increased staff levels. The Company has taken steps to
reallocate its resources to better meet client demand in future periods without
increasing costs or negatively impacting its research and development
activities.
7
<PAGE> 8
Selling expense as a percentage of net sales increased to 16.2% compared to
13.9% last year. The increase primarily resulted from additions at L.A.B., which
had significantly reduced its marketing activities prior to being acquired.
The Company also expanded its sales and marketing activities in Europe and Asia,
which should result in higher sales levels in future periods.
General and administrative expenses as a percentage of net sales increased to
28.7% in 1997 compared to 19.4% in 1996. The increase during 1997 is mainly
attributable to the inclusion of L.A.B.; increased spending on information
technology and unusual employee separation costs accrued in the third quarter.
Research and development expenses were $2.4 million in 1997 compared to $1.4
million in 1996. The Company has continued spending on internal development
projects in the U.S. and has supplemented its program with L.A.B.'s active
program in Europe. During the third quarter of 1997 spending on several products
was accelerated to advance these products into the clinical stages of
development. The Company expects to file two additional drug submissions in the
fourth quarter of 1997, as a result of this third quarter spending.
As previously mentioned, the Company terminated certain business combination
discussions during the third quarter of 1997. In relation to these discussions,
the company recognized a net credit of $400,000 in Other Income, representing a
$1 million payment made to its L.A.B. subsidiary and $600,000 of expenses
incurred by AAI. Additionally, the Company has also recognized approximately
$300,000 of impairment reserves, mostly attributable to the Company's decision
to divest certain previously disclosed commercial paper investments.
RESULTS OF OPERATIONS - NINE MONTHS 1997 COMPARED TO NINE MONTHS 1996
Net sales for the first nine months of 1997 increased 44% to $45.0 million
compared to $31.2 million in 1996. The core fee-for-service revenues were $41.6
million in 1997, up 39% from $29.9 million in 1996. The addition of L.A.B. was a
major contributing factor for this increase. Revenues from licensing and
royalties were $3.4 million in 1997 compared to $1.2 million last year.
Cost of sales as a percentage of net sales increased to 51.2% compared to 41.7%
last year. This increase is mostly attributable to the addition of L.A.B., which
has historically operated at lower margins compared to the domestic operations
of AAI and the operational inefficiencies discussed for the third quarter.
Selling expense as a percentage of net sales declined to 13.2% compared to 14.7%
last year. The decline primarily resulted from the addition of L.A.B. sales with
very little related selling expense. Prior to being acquired, L.A.B. had
significantly reduced its marketing activities. As discussed for the third
quarter, marketing activities have been expanded and further declines are not
expected.
8
<PAGE> 9
General and administrative expenses as a percentage of net sales increased to
25.0% in 1997 compared to 21.4% in 1996. The Company has continued its efforts
at controlling general and administrative expenses in line with overall growth.
The increase during 1997 is mainly attributable to the inclusion of L.A.B.;
increased spending on information technology and certain other charges during
the third quarter.
Research and development expenses were $5.8 million in 1997 compared to $3.2
million in 1996. The Company has continued spending on internal development
projects in the U.S. and has supplemented its program with L.A.B.'s active
program in Europe. As discussed for the third quarter, spending on several
products was accelerated to advance these products into the clinical stages of
Development. The Company expects to file two additional drug submissions in the
fourth quarter of 1997, as a result of this third quarter spending.
Other Income increased in 1997 compared to 1996 as a result of higher cash
balances generating more interest income, in addition to the items discussed for
the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. Working capital
was approximately $33.4 million at September 30, 1997 compared to approximately
$35.8 million at December 31, 1996. Additionally, the Company has available an
unused $20 million credit facility to supplement its liquidity needs.
Capital expenditures were approximately $8.1 million during the first nine
months of 1997 compared to approximately $5.1 million during the same period
last year. The Company anticipates total capital expenditures for 1997 of
approximately $10 million.
AAI expects to continue expanding its operations through internal growth and
strategic acquisitions. Such activities may be funded from existing cash and
cash equivalents, cash flow from operations and borrowings. The Company believes
that such sources of cash will be sufficient to fund operations and capital
obligations for the current and foreseeable future and to pay existing debt as
it becomes due. Although the Company has no present acquisition agreements or
arrangements, there may be future acquisition or growth opportunities that
require additional external financing for which the Company may from
time-to-time seek to obtain funds through the public or private issuance of
equity or debt securities. There can be no assurances that such financing will
be available on terms acceptable to the Company.
9
<PAGE> 10
FORWARD-LOOKING STATEMENTS
This quarterly report may contain certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on the
Company's belief and assumptions, as well as information currently available to
the Company. When used herein, the words "anticipate," "estimate," "expect," and
similar expressions may identify forward-looking statements. Although the
Company believes that the expectations reflected in any such forward-looking
statements are reasonable, there can be no assurance that such expectations will
prove to be correct. Any such statements are subject to certain risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results, performance or
financial condition may vary materially from those anticipated, estimated or
expected. Key factors that may have a direct bearing on the Company's results,
performance and financial condition include, but are not limited to, the
Company's dependence on and effect of government regulations; its management of
growth and acquisition risks, including its integration of acquired operations;
the level of outsourcing of research, development and testing activities in the
pharmaceutical and biotechnology industries; its dependence on key personnel;
and its dependence on third-party marketing and distribution of internally
developed drugs.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In 1996, the Company completed the sale of 3,105,000 shares of common stock
through an offering filed on Registration Statement Form S-1 (No. 333-5535)
which became effective on September 19, 1996. The net offering proceeds to the
Company after underwriting discounts and other expenses, as previously
disclosed in the Company's Form SR filings, was $44,793,000. A reasonable
estimate for the application of such proceeds is described below. Such
information represents cumulative totals through the reporting date of this
periodic report and all amounts, unless indicated otherwise, are for direct or
indirect payments to others.
Construction of plant, building and facilities $ 2,772,000
Purchase and installation of machinery and equipment $ 8,448,000
Repayment of indebtedness $ 748,000
Working capital $ 5,175,000
Research and development $ 6,918,000
Temporary investments (short-term, investment grade,
interest bearing) $20,732,000
$44,793,000
10
<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS:
A list of the exhibits required to be filed as part of this Report on Form 10-Q
is set forth in the "Exhibit Index", which immediately precedes such exhibits,
and is incorporated herein by reference.
REPORTS ON FORM 8-K:
None filed during the quarter ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
APPLIED ANALYTICAL INDUSTRIES, INC.
Date: November 14, 1997 By: /s/ FREDERICK D. SANCILIO
---------------------------------
Frederick D. Sancilio, Ph.D.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 By: /s/ STEPHEN F. RIZZO
---------------------------------
Stephen F. Rizzo
Vice President and Controller
(Principal Accounting Officer)
11
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APPLIED ANALYTICAL INDUSTRIES, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 - Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
3.2 - Restated By-laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (Registration No. 333-5535))
4.1 - Articles Fourth, Seventh, Eleventh and Twelfth of the form
of Amended and Restated Certificate of Incorporation of the
Company (included in Exhibit 3.1)
4.2 - Article II of the form of Restated By-laws of the Company
(included in Exhibit 3.2)
4.3 - Specimen Certificate for shares of Common Stock, $.001 par
value, of the Company (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
10.1 - Employment Agreement dated November 17, 1995 between the
Company and Frederick D. Sancilio (incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-5535))
10.2 - Applied Analytical Industries, Inc. 1995 Restricted Stock
Award Plan (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No.
333-5535))
10.3 - Applied Analytical Industries, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.4 - Applied Analytical Industries, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.5 - Applied Analytical Industries, Inc. 1997 Stock Option Plan
10.6 - Stockholder Agreement dated as of November 17, 1995 among
the Company, GS Capital Partners II, L.P., GS Capital Partners
II Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH,
Stone Street Fund 1995, L.P., Bridge Street Fund 1995, L.P.,
Noro-Moseley Partners III, L.P., Wakefield Group Limited
Partnership, James L. Waters, Frederick D. Sancilio and the
parties listed on Schedule 1 thereto (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
12
<PAGE> 13
EXHIBIT
NO. DESCRIPTION
--- -----------
10.7 - Preferred Stock Purchase Agreement dated as of November 17,
1995 among the Company, GS Capital Partners II, L.P., GS
Capital Partners II Offshore, L.P., Goldman, Sachs & Co.
Verwaltungs GmbH, Stone Street Fund 1995, L.P., Bridge Street
Fund 1995, L.P., Noro-Moseley Partners III, L.P., Wakefield
Group Limited Partnership and James L. Waters (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
10.8 - Loan Agreement dated as of December 21, 1992 between
NationsBank, N.A. and the Company, together with the First
Amendment and Second Amendment thereto and agreement extending
the term thereof (incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-5535))
10.9 - Loan Agreement dated as of November 1, 1988 between the
Company and The New Hanover County Industrial Facilities and
Pollution Control Financing Authority (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
10.10 - Letter of Credit Reimbursement Agreement dated November 1,
1988 between NationsBank, N.A. (formerly, NCNB National Bank
of North Carolina) and the Company, as amended (incorporated
by reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
10.11 - Lease Agreement dated as of March 7, 1994 between 5051 New
Centre Drive, L.L.C., as landlord, and the Company, as tenant
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.12 - Lease Agreement dated as of December 23, 1993 between I-40
Properties, as landlord, and the Company, as tenant
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.13 - Development Agreement dated as of April 25, 1994 between the
Company and Endeavor Pharmaceuticals Inc. (formerly, GenerEst,
Inc.) (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (Registration No.
333-5535))
10.14 - Development Agreement dated as of April 4, 1995 between the
Company and Aesgen, Inc. (incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
13
<PAGE> 14
EXHIBIT
NO. DESCRIPTION
--- -----------
10.15 - Loan Agreement dated as of December 30, 1996 between
NationsBank, N.A. and the Company (incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996)
10.16 - Registration Rights Agreement dated as of November 17, 1995
among the Company, GS Capital Partners II, L.P., Wakefield
Group Limited Partnership, James L. Waters, Frederick D.
Sancilio and the parties listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.16 to Post-effective
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-5535))
10.17 - Underwriting Agreement dated September 19, 1996 between the
Company and Goldman Sachs & Co., Cowen & Company and Lehman
Brothers, Inc., as representatives of the underwriters listed
on Schedule 1 thereto (incorporated by reference to Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
27 - Financial Data Schedule (for SEC use only)
14
<PAGE> 1
APPLIED ANALYTICAL INDUSTRIES, INC.
1997 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Applied Analytical Industries, Inc. 1997 Stock
Option Plan (the "Plan") is to promote the growth and profitability of Applied
Analytical Industries, Inc. (the "Company") and its subsidiaries
("Subsidiaries") from time to time by increasing the personal participation of
officers and key employees in the financial performance of the Company and by
providing such officers and key employees with an equity opportunity in the
Company. This purpose will be achieved through the grant of stock options
("Options") to purchase shares of the Company's common stock, $.001 par value
("Common Stock"), subject to restrictions on transfer or such other restrictions
as the administrators of the Plan may determine.
2. ADMINISTRATION
The Plan will be administered by the Company's Board of Directors (the
"Board"); provided, however, if the Board includes members who are not
"non-employee directors" (as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, or any applicable successor rule or
regulation) or "outside directors" (as defined in Section 162(m) of the Internal
Revenue Code of 1986, as amended, and the regulations thereunder (the "Code")),
then all authority of the Board under the Plan shall be exercised by a committee
of the Board (the "Committee") composed solely of at least two members thereof
who are both "non-employee directors" and "outside directors" (as so defined).
The Board or the Committee shall have complete authority to: (i)
interpret all terms and provisions of the Plan consistent with law; (ii) select
from the group of officers and key employees eligible to participate in the Plan
the officers and key employees to whom Options shall be granted; (iii) within
the limits established herein, determine the number of shares to be subject to
and the exercise price of, each Option; (iv) prescribe the form of instrument(s)
evidencing Options granted under the Plan; (v) determine the time or times at
which Options shall be granted to officers or key employees; (vi) provide, if
appropriate, for the exercisability of Options in installments or subject to
specified conditions; (vii) determine the method of exercise of Options; (viii)
adopt, amend and rescind general and special rules and regulations for the
Plan's administration; and (ix) make all other determinations necessary or
advisable for the administration of the Plan.
<PAGE> 2
Any action which the Board or the Committee is authorized to take may
be taken without a meeting if all the members of the Board or the Committee sign
a written document authorizing such action to be taken, unless different
provision is made by the By-Laws of the Company or by resolution of the Board or
the Committee.
The Board or the Committee may designate selected Board or Committee
members or certain employees of the Company to assist the Board or the Committee
in the administration of the Plan and may grant authority to such persons to
execute documents, including Options, on behalf of the Board or the Committee.
No member of the Board or the Committee or employee of the Company
assisting the Board or the Committee pursuant to the preceding paragraph shall
be liable for any action taken or determination made in good faith.
3. STOCK SUBJECT TO PLAN
The stock to be offered under the Plan shall be authorized but unissued
shares of the Company's Common Stock. An aggregate of 486,000 shares of Common
Stock are reserved for issuance upon exercise of Options. Any or all of the
Options granted under SECTION 4 hereof may, at the Board or the Committee's
discretion, be intended to qualify as incentive stock options ("Incentive Stock
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The number of shares reserved under the Plan may be adjusted to
reflect any change in the capitalization of the Company as contemplated by
SECTION 9 hereof and occurring after the adoption of the Plan. The Board or the
Committee will maintain records showing the cumulative total of all shares
subject to Options outstanding under the Plan.
4. OPTION AWARDS
(a) Eligibility and Factors Considered in Granting Options
The grant of Options under this SECTION 4 shall be limited to those
officers and key employees of the Company or any of its Subsidiaries who have
the greatest contribution to the Company's long-term performance and are
selected by the Board or the Committee. In making any determination as to the
officer(s) and key employee(s) to whom Options shall be granted under this
SECTION 4 and as to the number of shares to be subject thereto, the Board or the
Committee shall take into account, in each case, the level and responsibility of
the person's position, the level of the person's performance, the person's level
of compensation, the assessed potential of the person and such additional
factors as the Board or the Committee shall deem relevant to the accomplishment
of the purposes of the Plan.
-2-
<PAGE> 3
(b) Allotment of Shares
The Board or the Committee, in its sole discretion and subject to the
provisions of the Plan, may grant Options to participants eligible under this
SECTION 4, on or after the date hereof. Options may be, at the discretion of the
Board or the Committee: (i) Options that are intended to qualify as Incentive
Stock Options; or (ii) Options that are not intended to be Incentive Stock
Options; or (iii) both of the foregoing, if granted separately, and not in
tandem. Each Option granted under the Plan must be clearly identified as to its
status as an Incentive Stock Option or not.
Options granted under this SECTION 4 may be allotted to participants in
such amounts, subject to the limitations specified in the Plan, as the Board or
the Committee, in its sole discretion, may from time to time determine, provided
that, except as otherwise determined by the Board of the Committee, no
participant may be granted Options with respect to more than 200,000 shares of
Common Stock.
In the case of Options intended to be Incentive Stock Options, the
aggregate fair market value (determined at the time of such Incentive Stock
Options' respective grants) of the shares with respect to which Incentive Stock
Options are exercisable for the first time by a participant hereunder during any
calendar year (under all plans taken into account pursuant to Section 422(d) of
the Code) shall not exceed $100,000. Options under this SECTION 4 not intended
to qualify as Incentive Stock Options may be granted to any Plan participant
without regard to the Section 422(d) limitations.
(c) Time of Granting Options
The date of grant of an Option under this SECTION 4 shall be, for all
purposes, the date on which the Board or the Committee makes the determination
of granting such Option (each such date, a "Grant Date"). Notice of the
determination shall be given to each officer or key employee to whom an Option
is so granted under this SECTION 4 within a reasonable time after the Grant
Date.
(d) Exercise Price for Options
The price per share at which each Option granted under this SECTION 4
may be exercised shall be such price as shall be determined by the Board or the
Committee at the time of grant based on such criteria as may be adopted by the
Board or the Committee at the time of grant in good faith, taking into account,
in each case, the fair market value of the common stock, the level and
responsibility of the person's position, the level of the person's performance,
the person's level of compensation, the assessed potential of the person, and
such additional factors as the Board
-3-
<PAGE> 4
or the Committee shall deem relevant to the accomplishment of the purposes of
the Plan; provided, however, that in no event shall the exercise price per share
of an Option be less than 100% of the fair market value of the Company's shares
of common stock on the Grant Date for such Option. In the case of an Option
intended to qualify as an Incentive Stock Option, the price per share shall not
be less than 100% (or 110% for owners of more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary) of the
fair market value of the Common Stock on the Grant Date for such Option. Fair
market value shall be the average of the high and low sales prices per share as
reported by the exchange on which the Common Stock is trading, including without
limitation the NASDAQ National Market, on any Grant Date.
(e) Term of Options
The term of each Option granted under this SECTION 4 shall be
established by the Board or the Committee, but shall not exceed 10 years (or 5
years for owners of more than 10% of the total combined voting power of all
classes of stock of the Company or of a Subsidiary) from the Grant Date for such
Option.
(f) Cancellation and Replacement of Options
The Board or the Committee may at any time or from time to time permit
the voluntary surrender by the holder of any outstanding Option granted under
this SECTION 4 where such surrender is conditioned upon the granting under this
SECTION 4 to such holder of new Option(s) for such number of shares as the Board
or the Committee shall determine, or may require such a voluntary surrender as a
condition precedent to the grant under this SECTION 4 of new Option(s) to such
holder.
The Board or the Committee shall determine the terms and conditions of
any such new Option(s), including their exercise price and the periods during
which they may be exercised, subject to and in accordance with the provisions of
the Plan, all or any of which may differ from the terms and conditions of the
Option(s) surrendered. Any such new Option(s) shall be subject to all the
relevant provisions of the Plan.
The shares subject to any Option so surrendered or terminated shall no
longer be charged against the limitation or limitations provided in SECTION 3 of
the Plan and may thereafter become the subject of new Option grants under the
Plan.
The granting of new Option(s) in connection with the surrender of
outstanding Option(s) under the Plan shall be considered for the purposes of the
Plan as the grant of new Option(s) and not an alteration, amendment or
modification of the Plan or of the Option(s) being surrendered.
-4-
<PAGE> 5
(g) Vesting
Except as otherwise determined by the Board or the Committee, Options
shall vest as follows:
Aggregate Percentage of
Shares under Options
Date Vested on such Date
---- -------------------
Twelve months after Grant Date 50%
Twenty-four months after Grant Date 100%
Notwithstanding the foregoing, any Option granted pursuant to this Plan shall be
deemed fully vested immediately prior to an Acquisition Transaction. For the
purposes of the Plan, an "Acquisition Transaction" shall mean and include the
following:
(i) The consummation of a tender offer or exchange offer
for the ownership of securities of the Company
representing 51 % or more of the combined voting
powers of the Company's then outstanding voting
securities;
(ii) The adoption by the Company's stockholders of a
plan of merger or consolidation providing for the
merger or consolidation of the Company with another
corporation (other than an affiliate of the Company
within the meaning of the Securities Exchange Act
of 1934, as amended) and as a result of such merger
or consolidation less than 75% of the outstanding
voting securities of the surviving or resulting
corporation would then be owned in the aggregate by
the former stockholders of the Company; or
(iii) The transfer by the Company of substantially all of
its assets to another corporation or entity which is
not a wholly owned subsidiary of the Company.
5. NON-TRANSFERABILITY
An Option granted to a participant under the Plan shall not be
transferable by him or her except: (i) by will; (ii) by the laws of descent and
distribution; (iii) pursuant to a qualified domestic relations order as defined
by the Code or in Title I of the Employee Retirement Income Security Act, or the
rules thereunder; or (iv) as otherwise determined by the Board or the Committee.
In the case of an Option intended to be an Incentive Stock Option, such Option
shall not be transferable by a participant other than by will or the laws of
descent and distribution and during the optionee's lifetime shall be exercisable
only by him or her.
-5-
<PAGE> 6
6. EXERCISABILITY OF OPTIONS
Subject to the provisions of the Plan, Options granted under SECTION 4
hereof shall be exercisable at such time or times after the Grant Date to the
extent such Options are vested.
Any Option shall terminate in full (whether or not previously
exercisable) prior to the expiration of its term on the date thirty (30) days
after the date the optionee ceases to be an employee of the Company or any
Subsidiary of the Company, unless (i) the optionee shall (a) die while an
employee of the Company or such Subsidiary, in which case the participant's
legatee(s) under his or her last will or the participant's personal
representative or representatives may exercise all or part of the previously
unexercised portion of such Option at any time within one year, but not beyond
the expiration of its term, after the participant's death to the extent the
optionee could have exercised the Option immediately prior to his or her death,
(b) become permanently or totally disabled within the meaning of section
22(e)(3) of the Code (or any successor provision) while an employee of the
Company or such Subsidiary, in which case the participant or his or her personal
representative may exercise the previously unexercised portion of such Option at
any time within one year, but not beyond the expiration of its term, after
termination of his or her employment or directorship to the extent the optionee
could have exercised the Option immediately prior to such termination, or (c)
resign or retire after age 62 with the consent of the Company, in which case the
participant may exercise the previously unexercised portion of such Option at
any time within six months, but not beyond the expiration of its term, after the
participant's resignation or retirement to the extent the optionee could have
exercised the Option immediately prior to such resignation or retirement, or
(ii) the Board or the Committee shall determine otherwise.
In no event may an Option be exercised after the expiration of its
fixed term.
7. METHOD OF EXERCISE
Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to the
Company, (b) shall at the same time tender to the Company payment in full of the
exercise price for the shares for which the Option is exercised, which payment
may be made in cash, and (c) shall comply with such other reasonable
requirements as the Board or the Committee may establish; provided that in order
to enable an optionee (including but not limited to officers) to exercise
options granted under the Plan, the Board or the Committee may determine, in the
exercise of its discretion, to (i) cause the Company to lend money or other
property to such optionee upon such terms and conditions and in such amounts as
the Board or the
-6-
<PAGE> 7
Committee may determine, (ii) grant such optionee permission to pay the exercise
price in installments, or to accept such optionee's note as whole or partial
payment, (iii) permit such optionee to repay loans made by the Company to such
optionee for the exercise of options with issued and outstanding shares of
common stock, (iv) grant such optionee permission to pay the exercise price by
delivering for cancellation Options having an aggregate value (calculated by
subtracting the exercise price per share from the fair market value of a share
of Common Stock) equal to the total amount of the exercise price, or (v) provide
such financial assistance to such optionee as the Board or the Committee
determines to be desirable. The exercise of any option granted under the Plan
may be made subject to the condition that, if at any time the Board or the
Committee shall determine, in its discretion, that the satisfaction of
withholding tax or other withholding liabilities under any state or federal law
is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant thereto, then in such
event, the exercise of the option shall not be effective unless such withholding
tax or other withholding liabilities shall have been satisfied in a manner
acceptable to the Company, which may include the withholding by the Company of
shares of Common Stock to be issued upon exercise of an Option having a fair
market value equal to the required withholding amount. With respect to the
foregoing sentences, the value of the shares of Common Stock shall be the fair
market value determined in accordance with SECTION 4(D) of the Plan as of the
day of such payment or withholding.
No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for such shares has been issued by the Company.
An Option granted under the Plan may be exercised for any lesser number
of shares than the full amount for which it could be exercised. Such a partial
exercise of an Option shall not affect the right to exercise the Option from
time to time in accordance with the Plan for the remaining shares subject to the
Option.
8. TERMINATION OF OPTIONS
An Option granted under the Plan shall be considered terminated in
whole or in part, to the extent that, in accordance with the provisions of the
Plan and such Option, it can no longer be exercised for any shares originally
subject to the Option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding Common Stock of the
Company by reason of a stock dividend, stock split, stock consolidation,
recapitalization, reorganization, merger, split up or the like, the shares
available for purposes of the Plan or under
-7-
<PAGE> 8
option in outstanding option agreements pursuant to the Plan (and the option
price under such agreements) shall be appropriately adjusted so as to preserve,
but not increase, the benefits of the Plan to the Company and the benefits to
the holders of such Options; provided, however, that for any Incentive Stock
Options, in the case of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the excess of the
aggregate fair market value of the shares subject to any Options immediately
after such event over the aggregate option price of such shares is not more than
the excess of the aggregate fair market value of all shares subject to such
Options immediately before such event over the aggregate option price of such
shares.
Adjustments under this Section shall be made by the Board or the
Committee, whose determination as to what adjustments shall be made and the
extent thereof, shall be final, binding and conclusive.
10. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS
No certificate(s) for shares shall be issued upon exercise of an Option
until the Company shall have taken such action, if any, as is then required to
comply with the provisions of the Securities Act of 1933, as amended, the North
Carolina Uniform Securities Act, as amended, any other applicable state
securities law(s) and the requirements of any exchange (including the NASDAQ
National Market) on which the Common Stock may, at the time, be listed.
In the case of the exercise of an Option by a person or estate
acquiring the right to exercise the Option by bequest or inheritance, the Board
or the Committee may require reasonable evidence as to the ownership of the
Option and may require such consents and releases of taxing authorities as it
may deem advisable.
11. NO RIGHT TO EMPLOYMENT
Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon any
employee participant under the Plan any right to continue in the employ of the
Company, or shall in any way affect the right and power of the Company to
terminate the employment or position with the Company of any participant under
the Plan at any time with or without assigning a reason therefor, to the same
extent as the Company might have done if the Plan had not been adopted.
12. EFFECTIVE DATE OF THE PLAN
The Plan was adopted by the Board on __________ ___ 1997, and shall be
effective until ____________ ____, 2007 after which time
-8-
<PAGE> 9
no Option shall be granted, but such termination shall not affect any Option
previously granted under the Plan.
13. STOCK CERTIFICATE LEGEND. Each stock certificate issued for
options intended to be Incentive Stock Options shall bear the
following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED PURSUANT TO A
STOCK OPTION PLAN AND WERE INTENDED TO BE A QUALIFIED OPTION AS SET
FORTH IN SECTION 422 OF THE INTERNAL REVENUE CODE. IF THESE SHARES ARE
TRANSFERRED OR SOLD PRIOR TO __________, ____, YOU ARE REQUIRED TO
NOTIFY THE CORPORATION'S HUMAN RESOURCES DEPARTMENT AT (910) 392-1606.
-9-
<PAGE> 10
Dear
In accordance with the 1997 Stock Option Plan (the "Plan") of Applied Analytical
Industries, Inc. (the "Company"), you, as an officer or a key employee of the
Company or its subsidiaries, and in order to give you an added proprietary
interest in the Company and an additional incentive to advance the interest of
the Company, were granted on __________________, _____, an option to purchase
_____ shares of the common stock of the Company upon the following terms and
conditions:
(1) The exercise price shall be $__________ (___% of the fair
market value of a share as determined in accordance with
Section 4(d) of the Plan on the date of grant - _______,
-----);
(2) This Option will vest and become exercisable according to the
schedule set forth in the Plan;
(3) Once exercisable, this Option may be exercised until
__________, _____, subject to the terms and conditions of the
Plan, a copy of which is attached hereto and incorporated
herein by reference. This Option is granted subject to the
Plan and shall be construed in accordance with the Plan.
(4) This Option is (is not) intended to be treated as an
"incentive stock option" for purposes of Section 422 of the
Internal Revenue Code.
(5) To exercise this Option, the holder must deliver written
notice of the decision to do so and at the same time tender to
the Company payment in full of the exercise price for the
shares for which the Option is exercised, which payment may be
made in cash or as otherwise provided for in accordance with
Section 7 of the Plan.
(6) The exercise of this Option shall be subject to the condition
that, if at any time the Board or the Committee (as defined in
the Plan) shall determine, in its discretion, that the
satisfaction of withholding tax or other withholding
liabilities under any state or federal law is necessary or
desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant
thereto, then in such event, the exercise of the option shall
not be effective unless such withholding tax or other
withholding liabilities shall have been satisfied in a manner
acceptable to the Company, which may include the withholding
by the Company of shares of Common Stock to be issued upon
exercise of an Option having a fair market value equal to the
required withholding amount.
<PAGE> 11
This Option is not transferable except pursuant to the terms and conditions of
the Plan.
Very truly yours,
APPLIED ANALYTICAL INDUSTRIES, INC.
By:______________________________________
Title:___________________________________
I hereby accept the within Option and acknowledge receipt of a copy of the Plan.
- ------------------------------
Optionee
Date:_________________________
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPLIED ANALYTICAL INDUSTRIES, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,714
<SECURITIES> 0
<RECEIVABLES> 16,188
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,635
<PP&E> 23,682
<DEPRECIATION> 0
<TOTAL-ASSETS> 96,673
<CURRENT-LIABILITIES> 24,195
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 64,552
<TOTAL-LIABILITY-AND-EQUITY> 96,673
<SALES> 45,010
<TOTAL-REVENUES> 45,010
<CGS> 23,051
<TOTAL-COSTS> 45,970
<OTHER-EXPENSES> (1,466)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 506
<INCOME-TAX> 177
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
